Insights + News + Advice

Insights + News + Advice


The importance of year-end tax planning conversations.

The tax filing deadline of April 15, 2021 may seem like a long way off, but now is the time to begin preparing for it. There are many steps you can potentially take between now and the end of 2020 to lower your tax bill.

At Leelyn Smith, our tax advisors are here to help you evaluate those opportunities. An important part of how we do that is by guiding you through year-end tax planning conversations. To help you prepare for those conversations, here are some of the common questions and topics that we will want to discuss with you to learn about your current tax situation.

How to prepare for your year-end planning meeting.

You probably won’t get most of your tax forms, such as your W-2 and your 1099 income documents, until late January or early February. But there is still plenty of information that you can provide us this fall that will help inform your tax strategy.

Most importantly, we want to know about any changes to your personal or financial situation, as well as tax-related concerns that may be on your mind. Are you worried about how investment decisions you made in 2020 will affect your taxes? Have you made changes in your life – for example related to your employment or family situation? What are your biggest concerns for next year?

Tax-related issues can be wide-ranging and unique to the individual, so we encourage you to gather your notes and bring whatever questions you may have. And in turn, we will ask you a series of questions based on your personal circumstances.

Specific questions we can help you answer in 2020.

Here are some specific questions we may discuss during your year-end planning meeting. Some of these are specific to 2020’s investment environment and tax laws (some of which have changed because of the COVID-19 pandemic), whereas others are sound tax-planning techniques that may apply in any year.

  • Can you itemize this year? In recent years, the large increase in the standard deduction, combined with the $10,000 cap on state and local tax deductions, has greatly reduced the incentive for many individuals to itemize their deductions – particularly those living in high-tax states and municipalities. But if you would like to make some sizable charitable contributions this year, you can combine them with other deductions, which may lead you to benefit by itemizing.
  • Can you contribute more to your 401(k)? Depending on how much you have contributed to your tax-advantaged retirement accounts, you may be able to contribute additional cash to your 401(k), IRA, or similar plan before the year ends. If you have a traditional 401(k), your contributions will lower your taxable income. Individuals can contribute $19,500 to a 401(k) and $6,000 to an IRA in 2020. Also, keep in mind that there are additional catch-up contributions if you are age 50 or older.
  • Do you want to defer your RMDs? – If you are 72 or older, the government requires you to take withdrawals from your traditional IRA and 401(k) accounts by December 31 of every year. These are known as required minimum distributions, or RMDs. But the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act waived the RMD requirement in 2020. So, if you don’t need the money, you can let your retirement accounts continue to grow on a tax-deferred basis.
  • Is a Roth conversion right for you? Converting a traditional IRA to a Roth IRA may make sense for you if you think you will be in a higher tax bracket in retirement than your current tax bracket (thereby benefiting from the tax-free withdrawals of the Roth IRA) or if you don’t want to be forced to start withdrawing from your account at age 72. (RMDs don’t apply to Roth IRAs.) Such a conversion will be taxable, though, so you will need to have money available outside of your IRA to pay the associated taxes. You can also roll over a traditional 401(k) to a Roth IRA, but the same tax considerations apply. It is important to speak with your tax advisor before considering a Roth conversion.
  • If you are a business owner, can you purchase equipment before year-end? If you can make a large purchase by the end of the year, you will probably be able to deduct the entire amount you paid for the item on your 2020 taxes, rather than having to depreciate it over several years.
  • Can you delay additional mutual fund purchases? In December, many mutual funds pay out dividends and capital gains that have accrued over the year. If you buy more shares of a mutual fund just before the “ex-dividend date” – when the payout goes out to existing investors – you would also get the payout, but you would be required to report it as income and pay taxes on it, even if the money is automatically reinvested in extra shares.
  • Can you push your bonus back until 2021? It has been a challenging year for many businesses, but some of them may still be paying bonuses, either for performance or as a holiday gift. If your bonus is large enough, it could push you from one tax bracket to the next. So, if you have control over when the bonus is paid, you might want to push it back until next year.
  • Are you planning to make home improvements? A few years ago, new laws scaled back the deductibility of home equity loans and lines of credit. But you can still take a deduction if you use the loan or credit line for a home improvement project.
  • Did your Medicare Part B premium increase? If your income increased past a certain point, your Medicare Part B premium could have risen. Although the monthly increase might not seem all that substantial, it can add up over the course of a year to a substantial amount. It might be worthwhile to see if we can lower your adjusted income enough to reduce the Part B premium for next year.

Last reminder: schedule your tax planning conversation soon.

Of course, not all of these questions will be applicable to your individual situation, but they should give you an idea of the types of areas we will cover in exploring ways to improve your tax outcomes for 2020 – and beyond.

Please contact us soon to arrange your year-end tax planning conversation. We look forward to speaking with you.

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